UPDATE: Providing slightly more breathing space for the bankrupt steel company, RG Steel and its lenders agreed late today to demands by a creditors’ committee to extend the sale of company assets from July 27 to a “drop dead” date of August 24.
Financing by the lenders will be extended from early August to August 24 if a solid bid comes forward by the end of July.
The lenders of bankrupt RG Steel are planning to liquidate Sparrows Point and other company facilities under a 10-week sales timetable that will end in early August.
In papers filed in U.S. Bankruptcy Court in Delaware yesterday, Wells Fargo Capital Finance explicitly stated that the lenders have advanced $50 million to the company not to keep operations open, but only to fulfill existing customer orders, followed by a “liquidation of their assets.”
The lenders’ intentions are a blow to the 2,000 Baltimore steelworkers who have held out hope – encouraged officials of the United Steelworkers union – that Sparrows Point will be rescued by a new buyer and resume steel production.
A year ago, the USW’s top negotiator, David McCall, told Sparrows Point workers not to worry because RG Steel’s owner – billionaire financier Ira Rennert – was not “a fly-by-night operator” who would close, sell or liquidate Sparrows Point.
No Letters of Intent so Far
The bank lenders said the prospects for finding a buyer willing to operate the Sparrows Point mill are dimming.
The same is true for the company’s mostly idled Midwest mills at Wheeling, W.Va., Warren and Steubenville, Ohio, and several other locations.
Despite having 62 groups sign non-disclosure agreements with RG Steel, “none of the potential purchasers has submitted an offer or even a letter of intent for [purchasing] the mills,” according to yesterday’s filing.
While a buyer can still come forward, the likelihood is growing less probable, the lenders argue, because the mills are widely known to be up for sale and RG Steel has been trying to offload them for months.
So far, RG Steel has received just a single offer for a subsidiary, Wheeling Corrugating Co. The filing characterizes that offer from Esmark, Inc. of Pittsburgh as “below the far value of the company.”
Objections from Creditors’ Committee
A creditors’ committee – represented by the USW, Balli Group of London and other unsecured parties – has called on Bankruptcy Judge Kevin J. Carey to extend the length of time in which parties can come forward to bid on the plants.
Currently, the timetable calls for an auction on July 12, with bids opened on July 16 and a sale closed by July 27. The lenders are negotiating a possible compromise with the creditors’ committee that could extend the sale period.
This process is designed not so much to find an operator but to “liquidate [RG Steel’s] assets, in an orderly fashion, without the disruption and damage caused by daily fluctuations and, at times, shortages in cash flow,” according to Wells Fargo.
In other words, the company and its lenders are currently assuming that bidders will buy the idled equipment, property and rights to scrap the mills.
Wells Fargo and other senior lenders, such as GE Capital, are owed about $400 million and have liens on most of RG Steel’s assets. In order to get back their money, the bankers need a quick sales process.
A long list of other businesses and government entities – including Baltimore City and Baltimore County, collectively owed $7.2 million in unpaid water and sewage fees – are unsecured creditors and face little prospect of receiving more than a nominal amount of the debts owed.
More than $400 Million in Operating Losses
The filing also discloses the mammoth losses at RG Steel since the company purchased Sparrows Point and the other mills from Severstal last March.
For the first six months of RG Steel’s existence – from March 31 through October 31, 2011 – the company gushed $323,982,000 in red ink, according to an audited financial statement cited by the Wells Fargo filing.
Because of cash shortages, Sparrows Point’s “L” blast furnace and other facilities were forced to close shortly before Christmas last December.
The furnace was reopened in January after a cash infusion totaling $200 million from Cerberus Capital Management and Renco Group, the owner of RG Steel that, in turn, is controlled by the Rennert family.
Promised Profit Never Happened
When the Baltimore county mill reopened last January, RG Steel President John Goodwin said the company was projected to show an operating profit by April.
Instead, the company lost $119 million between January and April, according to the Wells Fargo filing.
This makes for losses of $443 million (excluding the months of November and December, where no financial data is available) since April 2011.
“In part due to the age and inefficiency of the mills, and in part due to depressed conditions in the steel industry following their acquisition by Renco, the debtors [RG Steel] persistently operated at a loss and consumed capital at an extraordinary rate,” the filing said.
Trying to Sell Mills Since March
In March, RG Steel hired investment banker James Tumulty, who has tried to interest buyers in Sparrows Point and the other mills.
And while a number of groups – including companies based in South America and India and ArcelorMittal in the U.S. – have toured Sparrows Point recently, none have followed through with any interest in buying all or part of the mills, according to Wells Fargo.
As part of the $50 million DIP (debtor-in-possession) financing extended by the banks after RG Steel declared bankruptcy on May 31, the company is obliged to keep within a stringent 10-week budget ending in early August.